Federal and Private Loans

  • What is the difference?

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What is the difference between federal and private student loans?

All student loans are either federal or private. Of the approximate $1.3 trillion in total student loan debt, $1 trillion is federal student loan debt and $300 billion is private student loan debt. The distinction is important because the two types of loans are serviced differently. Federal loans offer more options for borrowers struggling to make their payments as these loans are regulated by the government.

Private loans are secured through private institutions and based on credit worthiness. These loans offer fewer options for working out payment issues, and very often third party collectors are hired when a loan is in default. Fees are charged to the borrower for the collection costs, which only add to the growing debt. There are no cure programs that eliminate a record of default on the borrower’s credit history making default particularly detrimental to a borrower’s financial future. While deferment, forbearance, cancellation, modification, and refinancing are all options for a borrower, the lender is not required to offer any of these resolutions. A statute of limitations defense may be an option against collection but will depend on the state in which you live.

Federal loans offer many more work out resolutions for borrowers facing default and delinquency. There are two sources of federal loans, the Direct Loan Program and Federal Family Education Loan Program (FFEL). Direct Loans originate directly through the department of education while FFEL loans are offered through private institutions and guarantors but the money is federally guaranteed. The FFEL program ended in 2010.

Both the Direct and FFEL Programs offer Stafford and Parent Plus Loans. Stafford loans can be either subsidized (government pays the interest during deferment) or unsubsidized (interest accrues during deferment). Plus Loans are designed for students seeking graduate or professional degrees as well as parents of borrowers and are based on creditworthiness. A Plus Loan is the only federal loans that applies a credit worthiness standard.

The third type of federal loan is the Perkins Loan. This type of loan is funded directly through the school and the borrower makes payments directly to the school. Perkins Loans have a different set of repayment and cancellation options. The debt can be canceled incrementally and ultimately 100% of the debt can be canceled for students who take specific types of teaching positions or certain public interest jobs. The full list can be found here.

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